How Filing Bankruptcy Will Impact Your Credit Score
If you are considering filing bankruptcy, you likely have a lot on your mind. One of the questions is likely how bankruptcy will impact your credit. Fear of being unable to qualify for a future home loan or other forms of credit is the number one hesitation of consumers considering bankruptcy. The hard truth is that bankruptcy will impact your credit, but you can recover and qualify for the life you want.
Immediate Credit Impact
The good news is that a bankruptcy will either clear your debts or set you up on a reasonable repayment plan, allowing you to get back on your feet financially. The bad news is that it will not result in an immediate boost or change in your credit score. In fact, late payments and other credit issues related to debts discharged in bankruptcy can still appear on your credit report up to seven years after the initial reporting date. Additionally, any debts not taken care of by the bankruptcy will continue to impact your score.
The immediate credit impact is not all bad, though. Bankruptcy will lower your debt ratio and will typically result in a slight boost to your score, even with the negative mark of the bankruptcy itself. This will take time to show up on your credit report, though, so be patient. The manageable payments you are left with after bankruptcy should also help, as you will begin to build a history of making on-time payments. Still, you’ll need to put in some work to continue to raise your score, as the effects of bankruptcy alone will not repair your credit fully.
How Long Does Bankruptcy Stay on Your Credit Report
When it comes to how long bankruptcy stays on your credit report, a bit of it depends on what type of bankruptcy you will be filing:
- Chapter 13 Bankruptcy – The debts associated with this type of bankruptcy and the bankruptcy itself will appear differently on a credit report. A Chapter 13 bankruptcy that is completed may appear for up to seven years, as may the discharged debts. Because some of the debts will stay active for a three to five year repayment plan, they may stay on the report longer than your actual bankruptcy because the clock starts ticking on the bankruptcy as soon as it is complete.
- Chapter 7 Bankruptcy – A Chapter 7 Bankruptcy will stay on your credit report for up to 10 years, and since all of the debts in the bankruptcy are discharged within a few months of the filing, many of these will drop off a few years after filing the bankruptcy.
Basically, as a bankruptcy gets older, the items involved with have less and less of an impact on your credit score. This also means that it may be better to file bankruptcy before the credit companies have the ability to ruin your credit score. Filing for bankruptcy will allow you to start over sooner and begin rebuilding your credit.
Improving Your Credit Score After Filing Bankruptcy
There are a variety of ways that you can work to improve your credit score after filing for bankruptcy. Here are a few tips to get you started:
- Create a budget – This will help you stay on top of your finances and the credit counseling you were required to do as part of your bankruptcy should have taught you how to create a budget. If not, do not be afraid to reach out to a nonprofit counseling agency to get free basic budgeting assistance.
- Build an emergency fund – Unexpected expenses happen, but having as little as $250 in a savings account can protect you from having to run up a credit card or get a payday loan; either of which can start the debt spiral all over.
- Check your credit score – Everyone needs to check their credit score regularly, but it is essential for those who have filed bankruptcy. Keep a list of the debts that were included in your filing and check a few months after the discharge to ensure they show a balance of $0 and are no longer listed as delinquent.
- Reestablish credit – Depending on the type of bankruptcy that you file, it will fall off of your report in seven to 10 years. However, if none of your accounts are more than 10 years old, it basically puts you in the place of an 18-year-old with no credit history. Therefore, it is important to obtain credit after your bankruptcy is discharged so you can re-establish credit history and rebuild your score. Consider obtaining a secured credit card since they are much easier to get than other unsecured credit cards. A store card may have a lower requirement to qualify, but will likely have a higher interest rate. Regardless of the type of credit you get, be sure not to overextend yourself, do not max it out, and be certain to make payments on time.
- Do not open too many accounts – One of the things that impact your credit score is the number of accounts you have open. Too many accounts reflect negatively on your credit score even if you are making the payments on time.
- Make use of credit counseling – You should find the credit counseling and financial management counseling required by law to be helpful in restoring your credit, as well. Make use of the information learned in those sessions. Finally, it is important to note that the bankruptcy’s impact on your credit score will decrease over time, even before it falls off of your credit report. So time, coupled with smart financial moves, is the key to getting your credit score back up. It can be frustrating to work and wait, but the life you want is possible.
You should find the credit counseling and financial management counseling required by law to be helpful in restoring your credit, as well. Make use of the information learned in those sessions. Finally, it is important to note that the bankruptcy’s impact on your credit score will decrease over time, even before it falls off of your credit report. So time, coupled with smart financial moves, is the key to getting your credit score up. It can be frustrating to work and wait, but the life you want is possible.
Contact an Experienced Bankruptcy Attorney
The attorneys at Cornwell Law Firm can walk you through bankruptcy and the impact it will have on your life moving forward. We can even help you to discern between legitimate, helpful offers to rebuild your credit and predatory offers that are likely to do more harm than good. Contact us today to schedule a free consultation.